Why private sector supply chains should prepare for public crises

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First Hurricane Sandy appeared to have cast the US presidential elections into the shadows, while President Obama’s victory yesterday is likely to have caused the reverse. The apocalyptic scenes from the self-styled capital of the world will probably be forgotten by most outside the US eastern seaboard as newer events occupy the public consciousness.

Be that as it may, Hurricane Sandy wreaked terrible havoc, and the vulnerabilities of modern societies and their advanced supply chains were once again exposed. And they continue to be for those unlucky enough to still be suffering fuel shortages and other disruptions as the clean-up gets underway.

But it does make for a pertinent time to ask what vulnerabilities one’s own back yard has to equivalent events. For us that means the UK – but the lessons are broadly applicable to other regions.

Transport Intelligence’s chief executive John Manners-Bell gave a short talk to a group of assembled logistics executives last week about risks the UK faces with such systemic shocks, and asked how resilient the transport networks are.

The problem in answering that question, said Mr Manners-Bell, is that while any business worth its salt has crisis contingency plans, the real danger is posed by the vulnerability of entire networks – transport, IT, financial, fuel and food – that are mutually interdependent.

“For example if there was an anthrax scare – not an attack but a hoax – on the tube, God forbid, this would obviously close down the London Underground. People would spill out onto the streets of London, and the first thing they would do is get onto their mobile phones, overloading the telecoms network. Websites would be bombarded with inquiries, potentially taking them down.

“What impact would this have on the emergency services? As in the 7/7 terrorist attacks, traffic chaos would not just be restricted to London but would extend to the M25 and the major motorway interchanges. Overland train stations would be overwhelmed. Economic and humanitarian damage would be considerable. A very substantial crisis could occur,” he said.

Given that the chill of winter is now with us and parts of the UK have already seen their first snowfall, it is timely that of the various examples of shocks that Mr Manners-Bell described – the volcanic ash cloud, the 7/7 terrorist attacks – the nearest the UK has recently been to network meltdown (excuse the pun) was the brutal 2009-2010 winter in which the country’s salt grit stocks reached alarmingly low levels.

LCP Consulting was brought in by the UK government to re-engineer its salt supply chain the following year after the massive disruption caused during that winter. “Many companies, such as transport operators, retailers and public services were hit hard; leading high street retailers claimed to have lost millions of pounds of sales in their trading peak month of December, others had to bring forward their Christmas delivery dates, thus losing two of the busiest sales days of the year. Work by economists at the Department for Transport estimated the direct and indirect cost of disruption due to severe weather during the winter to be in the region of £1 billion, on average.”

Part of the problem was lack of visibility, said LCP chairman Alan Braithwaite. “The trouble was that the government didn’t actually know how much salt it had stocked; how much it could produce; or how much it consumed. The short answer was the advice to increase stocks by another 500,000 tonnes.”

Had it not, it is very likely that the UK road network could have been brought to halt the following winter, which was almost as cold.

The chief lesson there is necessity of inventory, an anathema to the lean supply chains of today. But Mr Manners-Bell also pointed out the inability of governments to shoulder full responsibility for disaster planning and response.

“What is lacking, in my mind, is the involvement of the private sector. You may recall at the time of Hurricane Katrina the US government was widely condemned for its lack of response to the humanitarian disaster in New Orleans. The only network which was agile enough was that of Wal-Mart. It managed to supply its shops throughout the stricken area, while government aid supplies were non-existent.”

In the UK, he added, substitute Wal-Mart for Tesco and Sainsbury’s, and with sufficient collaboration there would likely be enough capacity to deal with such a nationwide emergency. Nonetheless, the UK’s cumulative food stocks are hardly extensive – conservatively estimated at being able to supply the country for just five days.

Paul Carter, global head of risk consulting at Allianz Global Corporate & Specialty, said: “The very flexibility that provides a modern supply chain with its cost advantages has also caused its inherent vulnerability. Today, companies are increasingly re-examining the trade-off between efficiency and operational redundancy. To improve supply chain resilience companies should consider adding back some redundancy into lean supply chains, even if this reversal of widely used single-supplier sourcing incurs additional costs. Redundancy is expensive, but having no redundancy plan can be even more expensive.”

Given how much working capital inventory ties up, is it realistic to expect the private sector to store significantly more goods in preparation for an event that may or may not happen? Clearly there would have to be financial support from the government, and a definition of the exact responsibilities – financial and operational – would be the next logical step in preparing the country for the sort of multiple challenges currently afflicting the US.